Early repayments fell in Nov. for fourth consecutive month

Refinancings slow to 49.4% of mortgage applications

December 14, 2003|By BLOOMBERG NEWS

Early repayments on U.S. mortgages fell for a fourth month in November, as 30-year mortgage rates near 6 percent provided little incentive for consumers to refinance.

Fannie Mae said this month that the so-called prepayment rate on its 30-year, 5.5 percent mortgage-backed bonds dropped to 10.5 percent in November from 13.6 percent in October. The rate was a record 45.1 percent in July as the 30-year mortgage rate began rising from the record low of 5.21 percent.

Changes in prepayment speeds can hurt returns in the $5.1 trillion market for bonds backed by home loans. When interest rates fall, consumers refinance and the principal is returned to investors who must then reinvest at lower, current rates. When interest rates rise and prepayments slow, investors wait longer to get their money back, losing opportunities to reinvest at the higher rates.

Freddie Mac, the second-biggest buyer of U.S. home mortgages behind Fannie Mae, said its mortgage bonds also prepaid at a 10.5 percent rate, down from 12.8 percent in October.

The average 30-year fixed-rate mortgage averaged 5.93 percent last month, little changed from October. The Mortgage Bankers Association of America's index of refinancing declined to 2,100 from 2,319 in October - down 79 percent from its high in May.

The banking group said that refinancing accounted for 49.4 percent of all home-mortgage applications filed last week, down from 50 percent the previous week. The share of adjustable rate mortgages, however, increased to 29.3 percent last week, up from 26.6 percent.

"The drop in refinancings as a share of total loan originations is bringing to light the desire of many homebuyers to look at adjustable rate and hybrid loan products - those where the rate is fixed for three to seven years - as an alternative to traditional fixed-rate financing, particularly as short-term rates remain so low," said Jay Brink- mann, the association's vice president of research and economics.

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